Question

Assume that American rice sells for $100 per bushel, Japanese rice sells for 16,000 yen per bushel, and the actual nominal exchange rate is 100 yen per dollar

. What is the real exchange rate from the perspective of the United States? What is the real exchange rate from the perspective of Japan? Be sure to interpret each real exchange rate calculation…

Answer 1

1.real exchange rate from the perspective of the United States-

= (Nominal exchange rate* Price in US)/ Price in Japan

= (100 yen/1$) *($100/american rice bushel)/(16000 yen/ japan rice bushel)

= (10000*japan rice bushel)/(16000 *american rice bushel)

= 5/8 or 0.625 Japan rice bushel per american rice bushel.

It means For 1 American rice bushel you can get 0.625 Japan rice bushel.

2.real exchange rate from the perspective of Japan-

= (Nominal exchange rate* Price in Japan)/ Price in US

= (0.01 $/1yen) *(16000 yen/ japan rice bushel)/($100/american rice bushel)

= (160* american rice bushel)/(100 *Japan rice bushel)

= 8/5 or 1.6 American rice bushel per Japan rice bushel.

It means For 1 Japan rice bushel you can get 1.6 American rice bushel.